Before you start shopping for a vehicle, it’s a good idea to sit down and establish a budget. Determining how much money you can afford to spend on a car loan each month will help you make the right decision when it comes time to buy.
In addition to things like insurance and total cost of ownership, a factor that plays a role in your monthly loan payment is your interest rate. Interest rates are largely determined by your credit score. A good credit score usually means you’ll receive a low interest rate, while a bad credit scores can mean a higher interest rate.
How much interest you’ll be paying will affect how much can you afford in payments a month. That’s why figuring out what kind of interest rate you should expect before you start car shopping is important.
Credit bureaus use the information in your credit report and a specific formula to calculate your credit score. A history of on-time payments, a low debt-to-income ratio, and a limited number of outstanding debts are all factors that contribute to a good credit score.
A good credit score tells a lender you’re reliable and have a history of trustworthy financial decisions. In the eyes of a lender, you’re seen as a low risk candidate and so you should receive a lower interest rate.
A history of late payments, a high debt-to-income ratio, and outstanding debt are all factors that contribute to a bad credit score. Keep in mind, a lower credit score doesn’t mean you can’t get a new car loan, it just means the process can be slightly more difficult.
A credit bureau relies on the information in your credit report to give them a picture of your borrowing history. A low credit score means the chances of you reneging on your car loan or missing a payment is higher than that of a person with good credit. In this sense, you’re seen as a high risk candidate and you’ll be quoted a higher interest rate.
If your credit score is 700 or higher, you’re considered to have good-to-excellent credit. When you apply for a new car loan, you should expect to be quoted an interest rate of around 3 – 4%.
Some manufacturers offer as low as 0% financing on new vehicles for customers with good credit. That means there’s zero cost to you in terms of borrowing; you just pay the principle!
Things are a little different when you’re applying a used car loan. The lowest interest rate you can get with a vehicle that’s been previously owned is around 4.9%.
According to Statistics Canada, almost 3% of the Canadian population had a credit score below 520 in 2015. While 3% might not seem like a lot, Canada has a population of over 35.85 million people, which means more than one million Canadians have a low credit rating.
The average interest rate for someone with good credit is between 3% to 6%. Someone with bad credit can expect an interest rate of 6.5% to 15.9%, depending on how low the credit score is. Don’t let these numbers discourage you, though.
Due to an uncertain economy in recent years, lenders (like us!) have adopted easier ways for people with bad credit to get a car loan. After all, bad credit customers need an affordable payment plan the most. That way, they can use a car loan to help rebuilt their credit.
If you have bad credit, you’ll likely have to pay more in interest than a person with good credit. However, that doesn’t mean you’re forced to take any insurance rate you’re quoted, no matter the percentage. You have options.
We specialize in providing loans for customers with bad credit. We’ve helped over 30,000 Canadians get into vehicles they love with affordable payment plans (and yes, that means interest rates that are manageable).
We also offer extended loans so you can keep your monthly payments low. Plus, we don’t work with the banks who have a history of quoting “high risk” lenders unreasonably high interest rates. We use our own money to finance you, so you have a second chance at establishing good credit.
Are you having problems setting a realistic budget? We have a staff of trained credit specialists that can help. In addition to vehicle shopping, booking test drives, and finding deals in your area, they can help you factor potential interest rates into your budget. In fact, they can quote you an interest rate.
That way, you can get the number crunching out of the way and start looking for a new ride today!